A strong stock market rally early in the second quarter reversed in June amid renewed concerns over the fate of Greece and uneven economic data. The euro and British pound strengthened versus the U.S. dollar, but the yen declined. U.S. dollar strength, which had been a significant factor in returns over the last several quarters, moderated in the past three months. An appreciating U.S. dollar detracts from the returns for dollar-based investors who own nondollar-denominated securities. Small-cap stocks handily outperformed large-caps, while growth stocks outperformed value shares. Within emerging markets, stocks in Latin America and the Europe, Middle East, and Africa region recorded solid gains, but Asian emerging markets equities posted a modest loss.
The International Discovery Fund returned 6.16% in the quarter compared with 4.55% for the S&P Global ex-U.S. Small Cap Index and 3.91% for the Lipper International Small/Mid-Cap Growth Funds Average. For the 12 months ended June 30, 2015, the fund returned 4.03% versus −2.26% for the S&P Global ex-U.S. Small Cap Index and −1.69% for the Lipper International Small/Mid-Cap Growth Funds Average. The fund's average annual total returns were 4.03%, 13.72%, and 9.98% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2015. The fund's expense ratio was 1.21% as of its fiscal year ended October 31, 2014.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The International Discovery Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
Stock selection drove the portfolio's relative outperformance, while sector allocation also added to excess returns. Among sectors, stock selection and an underweight exposure meant financials performed best, followed by information technology and industrials and business services. On the downside, materials and health care weighed the most on performance due to negative stock selection.
We feel that prospects for U.S.-based investors are improving. Expansive monetary policy from the Bank of Japan and the European Central Bank has led to sharp depreciations of the yen and euro, which should prove stimulate for their respective economies. We also think the market underappreciates the progress Japan has made in terms of corporate governance. As a result, we see pockets of real value in Japanese small-caps, and we have increased our exposure in recent months. In China, the powerful liquidity-driven rally of the last 12 months has partly reversed over recent weeks, leading to increased investor anxiety. However, our long-term investment approach allows us to ride out short-term volatility such as this, and we continue to find a number of high-quality companies with solid earnings growth that trade at what we think are attractive valuations. Although valuations are high in a historical context, they are much more reasonable on a cyclically adjusted basis and compare favorably with their U.S. small-cap counterparts. Abundant liquidity and low cost of capital should continue to stimulate merger-and-acquisition activity, which is another tailwind for the asset class.